LipTea Incorporated purchases raw materials and has processing
plants around the world.
The firm has an average pre-tax cost of debt of 8%, an average tax
rate of 40%, and an international equity beta of 1.2. The risk-free
rate of return is anticipated to be 4% and the return to the
international market portfolio to be 12%. If the firm finances 40%
with debt and 60% with equity, what is the after-tax WACC?
10.08% |
||
12.96% |
||
11.36% |
||
10.50% |
Correct option is > 10.08%
Cost of debt After tax= Pretax cost of debt x (1-Tax rate)
Cost of debt After tax= 8% x (1-40%)
Cost of debt After tax = 4.80%
.
Cost of equity = Risk free rate + Beta x (Return on Market – Risk free rate)
Cost of equity = 4% + 1.2 x (12% - 4%)
Cost of equity = 13.60%
.
WACC after tax = Cost of equity x Weight of equity + After tax Cost of debt x Weight of debt
WACC after tax= 13.60% x 60% + 4.80% x 40%
WACC after tax = 10.08%
Get Answers For Free
Most questions answered within 1 hours.